WaMu pounded again

If anyone on Wall Street was looking for a light at the end of Washington Mutual's long, dark tunnel Wednesday, they didn't find it. Or maybe they did and decided it looked more like an oncoming freight train.

Shares in the Seattle-based lender sank to their lowest level in more than seven years, after corporate executives gave investors their first take on how bad they expect 2008 to be and New York's attorney general opened a new front in his legal attack on the company's mortgage-lending practices.

WaMu tumbled $4.19, or 17.3 percent, to close at $20.04, on more than five times the typical trading volume. In after-hours trading, the shares slipped below $20.

Analysts said there was no single bombshell to explain Wednesday's steep decline. Rather, they said, it was the combined impact of the bleak outlook for 2008, concerns over the potential reach of New York Attorney General Andrew Cuomo's investigation and worries about whether WaMu can — or should — maintain its relatively rich dividend.

"Bad news in a crummy market," summed up D.A. Davidson analyst Jim Bradshaw in an interview.

As the nation's housing boom has deflated and investors have largely fled the mortgage markets, WaMu — the nation's biggest thrift and one of its biggest mortgage lenders — has been among the companies hardest-hit.

At the beginning of this year, its shares stood at $45.49, more than double the current price.

In a note to clients late Wednesday, Credit Suisse analyst Moshe Orenbuch cut his per-share profit estimate for next year to $1.50 from $3.00, and his price target to $18.

Orenbuch estimated WaMu will have to set aside $5 billion next year for bad loans, compared with the $2.7 billion to $2.9 billion the company predicts for this year.

In its presentation to Wall Street analysts, WaMu for the first time said loan-loss provisions in the first quarter of 2008 should be in line with the $1.13 billion to $1.33 billion estimated for the current quarter. But that was as far ahead as they would look.

WaMu also said it expected total industrywide mortgage originations to drop to $1.5 trillion next year, down from an estimated $2.4 trillion this year and $2.8 trillion in 2006.

It said it couldn't give a 2008 estimate on noninterest income, a category that includes revenue from banking fees and from mortgages and other loans sold into the secondary market, though it said noninterest expense should top out at $8.5 billion.

"I don't think even they know the degree to which this is all going to shake out," said Erin Swanson, an analyst for Morningstar in Chicago.

Though executives said maintaining its dividend is one of the highest-priority uses for WaMu's capital, several analysts expressed doubts that would be possible. Orenbuch, in his note, predicted the company would cut its annual dividend to $1.25 a share from its current annual equivalent of $2.24.

Bradshaw, of Davidson, said WaMu might be better off to drop the dividend entirely and use the $480 million or so it costs the company each quarter to buy back shares. That, he said, might stop the stock slide that began in earnest in mid-October.

"I don't think the dividend is doing much to help the stock," he said. "No one is thinking this dividend level is sustainable."

Also Wednesday, Cuomo said he had subpoenaed Fannie Mae and Freddie Mac — the government-sponsored companies that are among the nation's biggest mortgage buyers — for information on what they do to ensure the loans they buy aren't predicated on inflated appraisals.

Last week, Cuomo sued one of the two third-party appraisal firms used by WaMu, charging it had knuckled under to pressure to make sure appraisers brought in property values sufficient for WaMu to make the loans it wanted. WaMu has denied the allegations and said it has ended its relationship with the appraisal firm.

Along with the subpoenas, Cuomo demanded that Fannie Mae and Freddie Mac either stop buying WaMu loans or hire an independent examiner — with his office's approval — to make sure the appraisals underlying the loans are legitimate. Both companies said they would.

The appraisal investigation raises yet another risk for WaMu: that it could be forced to buy back mortgages that were based on improper or fraudulent appraisals.

Frederick Cannon, an analyst for Keefe Bruyette & Woods, estimated last week that depending on what evidence comes out of Cuomo's investigation, WaMu could have to set aside anywhere from $412 million to $2.1 billion in extra reserves.

Though Cuomo's inquiry has to date focused on WaMu's lending practices, the attorney general indicated he thinks the entire real-estate appraisal system has been compromised by overeager lenders pressuring appraisers to come back with the "right" home values.

"I don't believe it's just about Washington Mutual," he said at a news conference. "I believe it's widespread. I believe it's the rule, not the exception."